Grokster tuned out

High court puts the unanimous kibosh on file sharing

This article was updated at 9:06 p.m.

WASHINGTON — Champagne corks are popping in Hollywood thanks to the U.S. Supreme Court’s ruling Monday that makers of online file-sharing software can be sued if they allow or encourage illegal swapping of copyrighted material.

Startling 9-0 decision reinstates the entertainment industry’s original lawsuit — which lower courts had tossed — against peer-to-peer software makers Grokster and StreamCast.

Case — filed by music and movie companies Time Warner, Disney, MGM, Viacom, Fox, NBC Universal, Vivendi Universal, Bertelsmann and EMI — will go to trial focused on the question of whether defendants “actively induced” users to commit copyright infringement. Defendants are promising a vigorous fight.

Decision left intact the Supreme Court’s 1984 Sony Betamax ruling, which lower courts had cited when tossing the original suit and which advocates had feared might be negatively affected by Monday’s opinion. It also soundly rejected defendants’ argument that a decision in favor of the entertainment industry would cast a chill on future technological innovation.

Still, Grokster, StreamCast and their allies also claimed a victory, but for now plaintiffs have most reason to celebrate.

“Today’s unanimous ruling is a historic victory for intellectual property in the digital age,” said Motion Picture Assn. of America topper Dan Glickman. “The Supreme Court sent a strong and clear message that businesses based on theft should not and will not be allowed to flourish.”

Indeed, the justices embraced the entertainment industry’s argument that P2P services should be held liable for infringements committed by users if the services were designed mainly for that purpose.

Justice David H. Souter, author of the opinion, wrote, “We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.”

The court said “substantial evidence” exists that Grokster and StreamCast, as the industry alleged, are doing precisely that.

In 2001 the major music recording labels and Hollywood claimed defendants developed and marketed their software specifically for the ability to share digitized songs and movies for free. Grokster and StreamCast denied the charges and claimed protection under the Sony Betamax ruling, which held that makers of devices capable of “substantial non-infringing uses” could not be held liable for whatever infringing use may occur. Defendants said P2P had many such uses.

District court agreed, dismissing the case. Ninth Circuit Court of Appeals later upheld that dismissal. Late last fall the Supreme Court agreed to hear the case.

Monday’s decision makes clear that the Betamax ruling is not a broad, open license for any kind of copying-and-distributing technology.

However, the court refused to narrow the Betamax ruling as the plaintiffs had requested.

Advocates of StreamCast and Grokster smiled somewhat. “Today’s decision reaffirmed the core principles of Sony and it also affirmed that P2P can have legitimate uses,” said Gigi B. Sohn, president of Public Knowledge, a consumer online-rights group. “P2P will live on. Hollywood and the recording industry will still have to live with it, and this is a pyrrhic victory at best.”

Confusion ahead?

Attorney Richard Taranto, who argued the case on behalf of Grokster and StreamCast, said the opinion was vague as to what constitutes “active inducement.” He predicted confusion for any jury that will have to decide whether the defendant’s actions rose to that level.

“Nonsense,” replied Ian Ballon, co-chairman of the intellectual property and Internet practice division of law firm Manatt, Phelps & Phillips. “They’ve got to try to put a happy face on a devastating defeat.

“I was struck by the clarity of the decision,” added Ballon, who filed an amicus brief for copyright holders when the case was still at the 9th Circuit.

“I do think the standard is a little muddled,” said Georges Nahitchevansky of copyright and trademark law firm Fross Zelnick. “The opinion gives good guidelines (on inducement) on this particular case, but you will never get this kind of case again.”

Future cases are likely to be more nuanced, he said, and developers of future P2P software will not have a clear understanding of whether they can be held liable. Neither Nahitchevansky nor Fross Zelnick has taken a position on the Grokster-StreamCast case.

Consumer Electronics Assn. topper Gary Shapiro warned of a wider ripple effect on all tech developers. “While the court appears to have sought to narrowly tailor this decision to protect technological development and provide some guidance to promote innovation, the intent test established under this ruling stands as a heavy burden,” Shapiro said in a statement. “Content creators may potentially find any act as an ‘infringement to induce’ and shut down a new product or service with the threat of a lawsuit.”

‘Orwellian’ decision

StreamCast general counsel Matthew Neco called the decision “Orwellian” because of what he suggested was a dangerous elasticity in the meaning of “active inducement.”

Congress could craft clearer, more specific legislation on the meaning. But one key lawmaker said that won’t happen right away.

“We’re going to have to study the decision further,” Rep. Adam Schiff (D-Calif.) told Daily Variety. “My gut reaction, though, is that the court did a fine, measured job in setting (an inducement) standard, and I would definitely resist any effort to legislatively undermine it by ‘clarifying’ it.”

Meanwhile, the entertainment industry hailed the decision as consistent with what it sought — a ruling that would protect copyright holders while also respecting the legitimate uses of file-sharing technology.

“The Supreme Court has helped to power the digital future for legitimate online businesses — including legal file-sharing networks — by holding accountable those who promote and profit from theft,” Recording Industry of Assn. of America prexy Mitch Bainwol said in a statement.

“Many of us both on the tech side and the creative content side woke up this morning hoping that the court would be as clear as we both wanted — and needed,” Andrew Lack, CEO of Sony BMG, told Daily Variety. “This court could not have been clearer. It’s pretty easy to see which services are designed to induce theft and which are not.”

Yet Strauss Zelnick, chairman of Columbia Music Entertainment, said more is still needed.

“The ruling confirms that file-sharing networks cannot hide from liability for copyright infringement. This is a necessary — but insufficient — victory in the war against digital piracy. We still need consumers to understand that stealing music and movies is just as wrong (and illegal) as stealing a T-shirt.”

(Michael Learmonth in New York contributed to this report.)

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